National Motorists Association Blog

New Car “Buyers”

Who can afford to spend $30,000 — the average purchase price paid as of 2013 — on a new car?

The answer is … very few.

Most new car “buyers” are in fact debtors. They sign loan documents and make monthly payments. Typically, for five years, the length of the average new car loan. Some extend this to six years — and seven years is not unheard of.

Some of you may remember when the typical new car loan was three years.

What’s happened?

Several things.

First — and most obviously — cars have become more expensive in real/inflation-adjusted terms. In 1970, a full-size family car — something like a Chevrolet Impala sedan — had a base price just over $3,000 (see here). Using the government’s own inflation calculator, this works out to just over $18,000 in 2014 dollars (see here). In contrast, a 2014 Chevy Impala has a base price just under $27,000 ($26,910).

Now, it’s true the ’14 Impala is a much better-equipped car than its 1970 counterpart. The ’14 comes standard with air conditioning and power everything, while the ’70 came standard with power nothing — and AC was optional. But the fact remains that the buy-in price of the ’14 Impala is about $10k higher than the ’70 Impala. And it is not possible to order a “de-contented” or “stripped” Impala without AC and other cost-adders. If you want the new car, you must come up with the money.

The problem, of course, is that most people haven’t got it. Wages (real take-home pay) haven’t increased appreciably since 1970 for most people. And the cost of nearly everything — excepting consumer electronics — continues to go up. Especially important things like food and fuel. It doesn’t leave much left for car buying.

So, most people borrow.

At interest.

For a long time.

Payment schedules are now close to twice as long as they were circa 1970 because otherwise, very few people could even afford to assume the debt load. That 2014 Impala, for instance, would cost you about $450/month for 60 months (five years) assuming no interest. On the 1970 “three year plan,” the monthly payment would be $750.

Which is why the five (and six) year plans are now the rule.

I expect this to trend to continue for the simple reason that cars are not going to get cheaper — at least, not unless the government stops piling on the mandates. If anything, these compliance costs are going to go up rather than down. Because there appears to be a complete disconnect between awareness of economic (and engineering) realities and the cost-no-object demand of politicians and regulators in Washington.

An excellent example/case in point is the federal Corporate Average Fuel Economy (CAFE) mandate, which will presently require that every new vehicle (cars and trucks) achieve an average of 35.5 MPG. This is set to nearly double to 50-plus MPG by 2020 (only about five calendar years away and far less than that for the car industry’s product planning purposes). Already, the effects are being felt. Take a look at the sticker prices of 2014 vs. 2013 model year vehicles, especially the “carryovers” that are basically the same but — as in the case of the 2015 VW Tiguan I wrote about recently (see here) are no longer available with a manual transmission, it having been retired in favor of a more fuel-efficient (though just slightly) but much more expensive and now mandatory standard equipment automatic. Manual transmissions are getting harder to find because automatics are more efficient nowadays. All else being equal, a typical vehicle will return about 1-3 MPG with a modern automatic than with a manual transmission.

But, these modern automatics — some of which have as many as nine forward gears, or “dual clutch” technology — are quite costly. And in more and more instances, you’re not given the choice. As in the 2015 Tiguan, it’s the automatic — take it, or leave it.

Another way the car companies are trying to make lemonade out of lemons is by turbocharging very small engines for on-demand power with higher overall fuel-economy. But turbos — the means by which decent power/performance levels are maintained — aren’t free. Yes, you pay less for gas.

But, you pay more for the car.

Here’s another: Auto-stop/start. It is another technological attempt to eke more mileage out of a car, in order to make Washington happy. The car’s computer automatically cuts the engine whenever the vehicle comes to a stop — and then automatically re-starts it (using a special high-speed/high-torque starter) when the driver takes his foot off the brake and depresses the accelerator. This may save a fractional amount of fuel. But it doesn’t come free, either. At minimum, that special high-speed/high-torque starter is needed. And it is very possible that down-the-road wear and tear on the engine will be higher due to the constant start-stop cycling. Keep in mind that when the engine is not running, there is no oil flowing. And it requires a stronger electrical system to maintain the battery’s charge (as well as a stouter battery) to deal with the constant start-stopping.

It all costs money.

Six air bags are now the de facto standard. Many new cars have eight or more air bags. At least one has eleven (the “Smart” car). These add cost — regardless of your feelings about “lives saved.”

None of the foregoing would be problematic — from an economic point of view — if people’s discretionary income had been rising in parallel with the cost of cars. But of course, the opposite — the inverse — is true. As cars have become more expensive, most people’s discretionary income has decreased.

This cannot continue forever — not because government will regain its senses (assuming it ever had any) much less its morals (utterly bereft) but rather because a critical nexus approaches. New cars will soon cost so much to buy — that is, to finance — that their “owners” will be under water before they make that last payment. Remember: A car is not a house. It is an appliance.

It depreciates in value.

At the end of a six-year car loan, the typical new car is worth about 50-60 percent of its original retail purchase price. You can see where this is headed. A point — not far off now — will be reached when most people will never own anything but debt. Perhaps the lease model will become the new normal. You’ll just swap out vehicles every so often. But the payments will never end.

Which, I suspect, is precisely what’s wanted. After all, what could be better — from a lender’s point-of-view (and from the government’s point-of-view) than perpetual payments? Endless debt?

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4 Responses to “New Car “Buyers””

Having just penned a deal for a new car right at that $30k mark, our family could easily afford to pay cash… but we wont… because it makes no sense to do so. We got financed at 1.74%. That $30k makes much more sense in our investment fund earning well above 4% vs in a dealers hands in exchange for a title. Yes we will be making payments for 5 years but, when the interest rate is lower than the expected rate of return in the market, it's a much better financial decision.

I completely agree with the issue of higher prices on base models but this is a result of lean manufacturing. Providing stripped versions of cars requires extra engineering for all of the additional model variations as well as storing additional parts in inventory. Not sure who is in the market for a family sedan without air conditioning or power anything, hence why it's not offered: because it wont sell enough to be worth the manufacturing hassle.

Expecting all cars to be 35.5mpg or even worse 50mpg in the next decade is ludicrous. The goal of driving fuel efficiency up is wonderful. In looking for a mid size SUV, fuel efficiency was one of our top requirements. So was power. No surprise we ended up with a turbo. Thanks Subaru!!

I would like to give you a little different perspective on the costs. If you easily have the money to pay cash for that gas wasting hog then you also have the cash to put it away to pay for damage if you cause it in a crash to it, collision coverage for damage that is your fault.

REquired Collision Insurance policy costs for a vehicle bought on time are very high compared to how much less you could be spending on just liability and uninsured motorist coverage. Pay cash for the thing, get the required liability and uninsured motorist coverage to protect what you have in property and money,. Then put away money to cover repairs if you damage the thing, then do the math……

For a driver like me who is a very careful driver who has never needed collision your math just doesn't add up. I have been driving for close to 4 decades over 3,000,000 miles, all vehicles I owned! I have only proper liability and uninsured motorist coverage to protect what I own. And I have never had the need for or the coverage for collision repair that would be my fault. If you can't afford to fix your car then you probably can't afford to buy it, in my eyes at least…….

My personal view is that people will eventually simply give up owning a car. Between the factors you mentioned, and others such as the CA SF Bay Area Metropolitan Transportation Commission demanding that we all live in 'transportation corridors', it is going to continue to grow more expensive and burdensome to own a car. Governments across the country are attempting to force the population onto bicycles and 'public transportation', and many are going right along with the program.

I'm hoping it won't happen in my lifetime (I'm 52), but I'm not optimistic about that.